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Milk prices and employment drive NZD higher

NZD - New Zealand Dollar

The New Zealand dollar outpaced its major counterparts through trade on Wednesday buoyed by improvements in domestic labour market performance and an uptick in FY2021 milk price forecasts. The NZD enjoyed early gains after Fonterra upgraded its expectations for milk prices from $6.90 to $7.50, underpinning future trade balance strength and helping to bolster NZD export demand. Further support came on the heals of domestic labour market data. The unemployment rate fell below 5%, printing in at 4.9%, well ahead of market expectations and a move back toward the natural rate of employment. Pushing through 0.72, the NZD touched intraday highs at 0.7225 before resistance and profit taking kicked in, forcing the currency toward the middle of recent ranges at 0.7185.

Our attentions now turn to ANZ’s preliminary business outlook. With the unemployment rate nearing its natural level, any signal inflation will continue its upward path could help foster further NZD upside. With resistance intact at 0.7220-0.7225 we expect the NZD to remain largely range bound through the day.

Key Movers

The euro downtrend continued through trade on Wednesday moving nearer to key psychological supports at 1.20, touching session lows at 1.2004. The single unit was driven lower as Italian bond yields and spreads fell sharply following ongoing political instability. Former ECB president Mario Draghi has accepted a mandate to form a workable coalition and the next Italian government. The spread to German Bunds fell 9 basis points and while inflation across the Eurozone rose markets remain pessimistic about the growth opportunities across the common market. GDP is expected to retract sharply through Q1 as national lockdowns and slow vaccine roll out flatten hopes that normal economic activity will resume in the near term. Having bounced off lows, the euro currently trades at 1.2037, however a break below 1.20 will likely open the door to a swift run lower.

Our attentions today turn to the Bank of England policy meeting and monetary policy statement. Policymakers have signalled a move to negative interest rates would not be appropriate at this time. We are keenly attuned to any change in this narrative. We expect the UK’s faster pace of vaccination and slow improvement in COVID-19 infection rates will continue to support the currency through the short term.

Expected Ranges

NZD/USD: 0.7150 - 0.7240 ▲

NZD/EUR: 0.5920 - 0.6010 ▲

GBP/NZD: 1.8820 - 1.9080 ▼

NZD/AUD: 0.9390 - 0.9505 ▲

NZD/CAD: 0.9150 - 0.9230 ▲